July 08, 2010
Broken Windows in Bozeman

Bozeman MT recently had a hail storm that damaged many buildings. Naturally it was treated as good news; the local paper reported "Storm boosts Bozeman economy."

Luckily, my excellent former student Shawn Regan now lives in Bozeman and sent this response to the paper:

Writing in 1848, Frédéric Bastiat explained the difference between a good and a bad economist. “The bad economist,” he wrote, “confines himself only to the visible effect.” By contrast, the good economist takes into account both “what is seen and what is not seen” when evaluating the results of an event.

To illustrate his point, he described the scene of a broken window, which onlookers claimed would actually benefit the town. The glazier would get extra business and the economy would be stimulated.

But as Bastiat pointed out, this line of reasoning is fundamentally flawed. It evaluates only what is seen, a new window, and neglects what is not seen, the countless ways the money would have been spent if the window had not broken. This often-repeated claim has become known as “the broken window fallacy.”

In the wake of last week’s hail storm, which left most Bozeman residents with literal broken windows, the Bozeman Daily Chronicle committed Bastiat’s enduring fallacy (“Storm boosts Bozeman economy,” July 7). The paper reported that the hundreds of thousands of dollars being spent repairing broken windows, dented cars, and fractured roofs will boost Bozeman’s economy.

But by reporting only on the increased activity in the repair industry the paper is focusing solely on what is seen. What is not seen are the foregone investments and purchases of clothing, appliances, and other goods and services that would have been made had the “windows” not been broken.

Economies do not prosper by repairing broken infrastructure. Otherwise, it would follow that the best remedy for the economic downturn would be nationwide hail storms – a ludicrous assertion. The unfortunate reality is that Bozeman is poorer, not richer, as a result of the storm.

Posted by E. Frank Stephenson at 12:15 PM in Economics

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. -Adam Smith

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